Stephen Yang
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Despite the outbreak of COVID-19 pandemics starting from March posted continuing pressure on all business across the globe, including ours. We are pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year, that is in line with our expectation. Total net revenue was $798.5 million, a slight difference of 5.3% in dollar term, or 1% in RMB term. A mix of results amounted to various business line were reported, which I will elaborate each of them shortly. Total student enrollments in academic subjects tutoring and test preparation courses as seen in the fourth quarter of fiscal year 2020, decreased by 6.2% year-over-year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in quarter much more challenging. While the enrollment for the summer and autumn classes have also been delayed. In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver expansion of the non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020, due to the negative impacts from pandemic, our top line performance, and the increased spending from operating free classes to promote our Koolearn kids of larger classes with the aim of taking more market share, our gross margin recorded for the quarter was 51%, down 500 basis points year-over-year. Our non-GAAP operating margin for quarter was 4.1% down 810 basis points year-over-year and non-GAAP net margin for the quarter was 6.1% down by 520 basis points year-over-year. In order to minimize the negative impacts caused by COVID-19 dynamics to our bottom line, we actively adjusted to our operational strategy and the made more efforts on cost control and reducing expenditures. Especially for business lines facing bigger negative impacts in the near-term. We believe that our continuous efforts will sustain us through the crises and hopefully that the adverse effects on our business from the pandemic will subside gradually. Per program blend ASP, which is cash revenue divided by total student enrollment decreased by 14.8% year-over-year in dollar terms as for hourly blend for ASP which is GAAP revenue divided by the total teaching hours decreased by proximately 3.5% year-over-year in our business. To provide the breakdown of the hourly blend ASP please note that - class increased by 0.2%. U-Can VIP personalized classes increased by 3.5%, Pop Kids increased by 6.4% and [indiscernible] programs increased by 16.1% year-over-year in RMB terms. Comparing with the normal pricing increase of 5% to 8%. This quarter is already blended ASP first was lower than normal level mainly because of the bigger decline of the overseas test preparation program and U-Can VIP personalized classes business, which already blend ASP much higher than the other programs as well as the use of the two part as we provided for the customer to support a migration from offline class to online or OMO class during the winter. Now I would like to spend some time to talk about fourth quarter performance across our individual business line in detail. In this unprecedented period, we see a mix of the results among the each of the business line. Our Q1 of our K-12 - school total business achieved a year-over-year revenue growth of approximately 4% in dollar terms, or 8% in RMB terms. Breaking down, the U-Can middle school/high school all subject - school children business recorded revenue increase of approximately 1% in dollar terms or 5% in RMB terms for the quarter. Student enrollments grew approximately at 0.1% year-over-year for the quarter, excluding VIP one-on-one business U-Can small class business grew by approximately 15% in dollars terms, or 20% if measured in RMB. Our POP Kids program delivered outstanding results with revenue up by about 10% in dollar terms, or 14% in RMB terms for the quarter. - decreased by 9% for the quarter low as the outbreak of the COVID-19 has caused the challenges and acquired a new customer in the quarter while the enrollment for the summer autumn classes had been delayed. Our overseas released business including test prep and consultant business faced with the most difficult challenges due to the cancellation for overseas exams, suspension of the overseas schools and restriction on travels. The overseas test prep business revenue declined by approximately 62% in dollar terms, or 50% if measured in RMB. Higher despite the challenges, the consulting business grew by approximately 6% in dollars terms or 11% in RMB terms. And finally, VIP personalized classes business reported revenue decline of about 36% year-over-year in dollar terms, or 44% in RMB terms year-over-year for the quarter. Our summer promotion strategy also delivered outstanding results. We offered low price experiential courses for multiple subjects in total of about 69 cities targeting entryway for primary and secondary school students customers before this start this new school year. The promotion price is similar to last year at around RMB400. Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation. This summer promotion remains very well received by the market. We are pleased to see that the promotion enrollment we brought in before the start of the summer holiday - this year achieved a 20% increase comparing the same period of last year, reaching 986,000 enrollments. The encouraging results have proven that such sound and highly profitable strategy enables us to capture and increase our market share in high growth K-12 after school children market, also puts us in a more favorable position during this market consolidation period. As certain players may lack financial or digital capabilities to sustain their operation during this challenging times. As if students move to the higher grades, we expect the continually improvements in retention rates and customer loyalty will drive revenue growth in the next three to six years. We will continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion indices where we see potential for rapid growth and strong profitability. This quarter we added a net of 44 learning centers [indiscernible], opened a new training school in the city of Weihai, as well as four K-12 model school in the city of [indiscernible]. All together this increase the total square meter of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter. Despite such challenging times we didn’t close our expansion plan on hold, as we wanted to insure and we are fully prepared when the pandemic is over. And our service will resume with strong presence across different Chinese cities. As outbreak of COVID-19 has highlighted the important sentimental of the online education. We have placed the more resources in these area and invested $36 million in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported to be migration of our offline class to small size online class during the pandemic. Apart from the OMO infrastructure, we have allocate part of the resources in advance to the training programs for our teachers to enhance their online and offline teaching skills, as we assume to be growing demand in markets. At the same time we continue to upgrade our technology platforms and we will broaden the usage of the online tools and contents in our OMO system flow business line through the whole network, as well as further development of the best teaching contents and course, where to cater on online/offline integrated education methods. We are glad to see that our industry leading OMO ecosystem has now only successfully managed to cushion most of the impact our service and operation costs of pandemic, but we also see the refund rate from the cancellations have been stabilized at a normal level as we entered into the spring semester. While our customer retention rates from winter to spring semester and from spring to summer semester we are trending higher than same period last year. Which further demonstrated that our customer satisfaction and then fact the status of our online course through our OMO system. To further tap into the huge market opportunities in the online education, we continue to place in more resources in koolearn in executing universities in our K12 online afterschool children business in fiscal year 2020. This includes content development, teachers, recruiting and training, sales and marketing, R&D and other necessary copy expenses to drive the goals of the new online programs. With these programs, we are able to reach out to more students in the low tier cities in interactive and scalable approach. We believe this will help koolearn.com to gain new market share in the online education space and [indiscernible]. In the past quarter, koolearn is a large scale market promotion by offering three large sites online level enhancing classes through public and then tracks several times more traffic than normal time. Koolearn also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our standing on the marketing front, but we believe those are necessary and understandable measures as we found ourselves year in and year out of the pandemic situation. The future class model has been offered Pop Kids program in 48 existing cities, U-Can program in 29 existing cities and for both Pop Kids and U-Can K-12 business in 10 new cities. We are glad to see the model has proven to be successful and variously increased market penetration in both markets we have tapped into. We also saw improved customer retention and scalability. With these proven results, we will continue this strategy going forward. Now, let me walk you through the other key financial details for the fourth quarter. Operating cost and expenses for the quarter was $788.2 million, representing a 2.9% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude share based compensation expenses were 765.9 million, representing a 3.5% increase year-over-year. Cost of revenue increased by 5.3% year-over-year to $391.1 million primarily due to increased teachers compensation for more teaching hours, and then higher rental costs for the increased number of the schools and learning centers in operation. Selling and marketing expenses increased by 11.4% year-over-year to $118.0 million primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunities during the pandemic, especially for the new initiatives in K-12 tutoring or pure online advertising platform koolearn.com. General and administrative expenses for the quarter decreased by 3.3% year-over-year to $279.2 million. Non-GAAP general mix with the expenses, which include the share based composition expenses were $261.0 million, presenting a 1.3% decrease year-over-year. Total share based compensation expenses, which were allocated to related operating cost and expenses decreased by 13.5% to $22.3 million in the first quarter of fiscal year 2020. Operating income was $10.3 million and 86.7% differs from $77 million in the same period prior fiscal year. Non-GAAP operating income for the quarter was $32.5 million or 68.3% decrease from $102.7 million in same period of prior fiscal year. Operating margin for the quarter was 1.3% compared to 9.1% in the same period of prior fiscal year. Non-GAAP operating margin which excludes the share based compensation expenses for the quarter was 4.1% compared to 12.2% in same period of prior fiscal year. Net income attributable to the New Oriental fourth quarter was $13.2 million representing a 69.5% decrease from the same period of prior fiscal year. Basic diluted earnings per ADS attributable to New Oriental were $0.08 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $48.5 million representing a 49% decrease from the same period prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.31 and $0.30 respectively. Net margin for the quarter was 1.7% compared to 5.1% in same period prior fiscal year. Non-GAAP net margin for the quarter was 6.1% compared to 11.3% in the same period prior fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million. Capital expenditure for the quarter were $89.7 million, which were primarily attributable to the opening of 73 facilities and renovations at existing learning centers. Turning to a balance sheet, as of May 31, 2020 New Oriental had cash and cash equivalents of $915.1 million, compared to $1,414.2 million as of May 31, 2019. In addition, the company had $284.8 million in term deposits, and $2,315.3 million in short-term investments. New Oriental’s deferred revenue balance which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructional delivers, at the end of the fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1301.1 million at the end of the fourth quarter prior fiscal year. We are now approaching to new fiscal year. Despite the continued challenge from the COVID-19 pandemic, I expect to be remain - we are still optimistic towards the Company's business in the long run, and we will continue to focus on following key areas. First, we will continue to expand our offline business, we aim at around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business. We believe it will prepare us to further take more market share from other players post COVID, as we believes some small players without strong financial position and online class capability may not be able to sustain its business during the hard period. And we expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are major player with the strong financial capacity/offline facility enable us to further strengthen our merchant leading position in the penetration. Second, we will continue to leverage our investments into digital technologies as we introduce our OMO system in more offline - training and test offerings, especially for our K-12 business. The usage of online tools and contents in our OMO systems for all business clients while the whole network will be enhanced. To uplift the whole learn more teaching experience, we will play more efforts in developing the best teaching content course and also developing more advanced training programs to our teachers. For some who might not be very familiar with our OMO business model, allow me to spare a few minutes, now to elaborate the four key OMO strategy we have in place. Number one, the online system is mainly used to supplement the offline classes we have in a system city with a hybrid format. Number two for the CDs, we have partners, but may have enough learning centers to cater all our customers, our OMO system enable us to reach out to more students and customers. Number three, for some providences problems where we don’t have centers in all of the cities, our OMO system allow to reach us to students [indiscernible] CDs. Number four. We offer a series of complimentary low cost experimental online classes for people and students to experience our classes, hoping to attract new customers. Here I have to highlight that all of this OMO products are supported by our offline classes. They supplement each other. As a teaching contents, courseware materials as well our teachers and technology development are originated from our existing offline centers and resources. We believe that the above mentioned OMO initiatives will be one of our growth engines to increase our customer acquisition post COVID and enabling us to capture the markets consolidation opportunity. This advanced new business model will also accelerate our margin recovery in the rest of the year and the further expand our long-term or allows for margin targets. Furthermore we will continuously invest in and implement new initiatives including a content, development teachers we put in training, R&D as well as sales marketing in K-12 after school tutoring are on koolearn.com. Our top priority will remain as the focus on controlling costs and reducing expenditures across the company to minimize the negative impact of some pandemic on our bottom line. We believe we will resume the expansion of overall non GAAP operating margin year-over-year as COVID-19 subsides. Here I would like to stress that we have great confidence in the fundamentals of our business, which we will believe will continue to remain strong. Although we are facing various short-term negative impact on the pandemic and we have been increasingly in different strategy, we remain optimistic of brighter prospective of our business and we believe our investments now will bring up full return in the long run. We are certain that with New Oriental leading brands, superior education product and system and the best teachers resources we have the ability to take further market share in China’s huge after school children market and deliver long-term value for our customers and shareholders. Looking on a near-term and our expectations for the next quarter, we have factored in various considerations, including the one month delay of national [indiscernible] the delayed enrollments for summer and all the classes this year in many major cities and the shortening of the summer holiday in many major cities have one to two weeks. Summer courses into July and August will be turned down to three to four terms only, which we typically have four to five terms probably. As well as of the recent emergence of the COVID-19 cases in cities such as Beijing have resumed some of the public schools and children's schools in these areas. Inevitably all these and personal situation have costs the lower ability of our business and performance data for the summer quarter, hence we take more conservative approach to make our forecast for Q1 2021. We expect total revenue to be in the range of $911.2 million to $953.5 million representing a year-over-year decline in the range of 15% to 11% in dollar terms. Taking into consideration of the impact of potential change in exchange rate between RMB and U.S. dollar, the projected a revenue decline rates is expected to be in the range of 14% to 15% for the first quarter of fiscal year 2021. To provide a breakdown of the effects the top rank was for key business line. K-12 all subjects after school children business is expect to grow 3% to 7%. Overseas test prep program is expected to decline 55% to 51% and overseas study consulting business is expect to decline 7% to 11% year-over-year in RMB terms. With respect to overseas related business, including overseas test prep and consulting service will continue to decline due to the pandemic around the globe caused by the cancellation of the oversea exams and suspension of the overseas schools and the restriction on travel. The net impact on those overseas related business will affect the entire education the overseas test preps industry in China not only New Oriental and may last over the coming one or two quarters. With that said, in contrast present effective control of the pandemic situation have shed a more positive light on our business domestically, we are pleased to see that we have gradually resumed our offline operations in over 90% of the cities that we are in, and vast majority students in this cities have successfully migrated back to our learning centers from OMO online classes. We have also seen significant pick up in the year-over-year turnovers during enrollment and test proceeds from students in July this month for the summer quarter, which is positive signs of recovery. To conclude, we are now teaching all kinds of operational actions to boost the enrollments and classroom utilization whole summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers. We are confident that demand for after school children business will pick up gradually in the summer and in the rest of the fiscal year. I must mention that these expectations reflect New Oriental’s current and preliminary view which is subject to change. At this point, I will take your questions. Operator, please open the call. Thank you.
